Effects of oil price uncertainty on corporate investment of Islamic stocks: evidence from the extreme event of Covid-19 pandemic

Abstract

Purpose This paper aims to examine the effects of oil price uncertainty on corporate investment of Islamic stocks during the COVID-19 pandemic. Design/methodology/approach The study uses a panel data set that covers 398 listed Islamic stocks from seven major Asia Pacific countries over the period of five years from 2017 to 2021, yielding 1,990 observations. Specifically, this paper investigates the said association by combining the real options theory regarding investment and the panel data-based econometric method that captures the dynamic relationship, the generalized method of moments estimators. Findings The findings show that the relationship between the oil price volatility and corporate investment of Islamic stocks is significant and nonlinear in nature, suggesting the presence of both the growth options and the waiting options. Overall, the results reveal that corporate investment of Islamic stocks is hindered during the unprecedented corona crash, when oil price increases at exponential rates. Practical implications The findings suggest that considering the information caused by unprecedented events like the COVID-19 pandemic is crucial for investment decisions of Islamic stocks. Therefore, policymakers and regulators should incorporate the impact of oil price uncertainties caused by unprecedented events like the COVID-19 pandemic on firm’s investment expansion and diversification strategies. Originality/value To the best of the authors’ knowledge, this paper is the first to examine the relationship between the investment of Islamic stocks and the oil price uncertainty under compound options theory in top Asian oil-importing countries.